PT - JOURNAL ARTICLE AU - Robert M. Dunsky AU - Thomas S.Y. Ho TI - Valuing Fixed Rate Mortgage Loans with Default and Prepayment Options AID - 10.3905/jfi.2007.683315 DP - 2007 Mar 31 TA - The Journal of Fixed Income PG - 7--31 VI - 16 IP - 4 4099 - https://pm-research.com/content/16/4/7.short 4100 - https://pm-research.com/content/16/4/7.full AB - There are three integral components to value a fixed rate mortgage loan: 1) the mortgagors' American straddle option on the underling loan, (a call option to refinance and a put option to default); 2) the mortgagors' heterogeneous behavior in exercising the options inefficiently; and 3) the market price of risk, [the option adjusted spread (OAS)]. Despite the dominance of mortgages in the capital market, scant research considers the valuation of mortgage loans while taking these three components into consideration, a contribution of this article. Specifically, this article uses a multinomial logit model to describe the mortgagors' behavior in dealing with the competing refinancing and default risks, and then utilizes a two factor arbitrage-free interest rate model to value the mortgages.TOPICS: Fixed income and structured finance, options, simulations